FE Editorial: Clunkers and dollar

Finally, there is some good economic news out of the worlds largest economy. US GDP grew by 3.5% in the quarter between July and September, a sharp jump from the either lethargic or negative growth rates recorded in the most recent four quarters. To the extent that this downturn is in part a confidence game, such good news is always welcome. It will boost consumer and investor sentiment. However, it is still much too early to call a sustained recovery. It is instead a reason for those who believe that government stimulus can work effectively to feel vindicated. Indeed, any sensible interpretation of this US GDP number has to give much credit to the massive stimulus unleashed by the US government. When one disaggregates the 3.5% number, one finds that the strongest recovery is coming from consumer demandthat accounts for 70% of US GDP. But within that head, there is strong growth (around 22%) in consumer durables. And this is where the key to understanding the 3.5% figure lies.

The most important category under consumer durables is automobiles. Here, the governments now famous Car Allowance Rebate System (Cars)better known as cash for clunkershas played a crucial role in boosting demand. Under this programme, which ran for a limited period between July 1 and August 24, car owners were encouraged to trade in their old gas guzzlers for newer, more fuel-efficient cars. Crucially the government was committed to financing this scheme. Unsurprisingly, the entire budget for the programme was exhausted by the time it closed. And it shows in the GDP growth numbers. The caveat, of course, is that the cash-for-clunkers programme was a one-off measure, and its positive effect on GDP will show up just for this quarter, which has passed. And that really is the crux of government stimulusit can only be a temporary measure, not permanent. Already, the US government is running into severe budget constraints. A sustainable recovery, therefore, has to be based on fundamentals beyond just temporary government intervention. And the US continues to remain some distance away from a complete recovery in fundamentals. Joblessness is still rising, even though at a decreasing rate. And a revival of the real economy seems months away, even though the financial sector has got back on its feet. Perhaps what will help recovery in the US most is the decline in the dollar. This will give the real economy, particularly export-oriented manufacturing, a fillip. It will also switch consumer demand to locally produced goods & services. Still, things are looking up for the US and the global economy much faster than most analysts had expected at the same time last year.